Question

5. This year XY partnership reported income before guaranteed payments of $120,000' X performed services for the partnership and received 30,000 . Calculate Ordinary income and how much income will X report( X and Y are equal partners)

Answer 1

Guaranteed payments to partners are outlined in Section 707(c) of the Internal Revenue Code (IRC), which defines such payments as those made by a partnership to an individual partner for services or for providing capital, and which are determined without regard to the income of the partnership.

When such payments meet this definition, they are considered made to a non-partner for tax purposes for both the partnership (payer) and the recipient (payee). More pertinently, such a payment to a partner is treated as ordinary income. And for the partnership, such payment is deductible under IRC Sec. 162 (ordinary or necessary business expenses) or capitalized under IRC Sec. 263.

partnership reported income before guaranteed payments of $120,000

Less: X performed services for the partnership and received $30,000   

Ordiary Income for partnership firm $90,000

X will report = Gauranteed income + share in profit from partnership firm

X will report = $30,000 + ($90,000 *1 / 2)

X will report = $30,000 + $45,000

X will report = $75,000

And Y Will report = ($90,000 *1 / 2)

And Y Will report = $45,000